The ultimate retirement planning guide for 2022

On the surface, retirement planning hasn’t changed all that much over the years. You work, you save and then you retire. But while the mechanics may be the same, today’s savers are facing some challenges that previous generations didn’t have to worry about.

 First of all, life expectancy is longer, which means you’ll need your money to last longer – potentially into your 90s. Bond yields are also much lower than they used to be, which means you can’t buy a few fixed-income instruments and earn a double-digit return. Then there is the health crisis due to the coronavirus pandemic.

 This is compounded by the fact that more companies are moving away from defined benefit pensions —which guaranteed you a certain amount of money in your golden years — to defined contribution plans, which are more subject to market ups and downs.

Tips to afford anything you want in life

So, how can you have the retirement you’ve always wanted? After all, retirees want to experience all the things they couldn’t do when they were too busy working. Exotic travel vacations, marathon running, novel writing, spending more time with friends and family — the possibilities are almost endless. There are several steps, which we explain in this retirement guide, from budgeting and setting goals to choosing the right retirement savings account that will help you map out a plan that’s right for you.

How to read this guide

This guide lays out steps to focus on to get you working on retirement planning. Follow along from start to finish, or jump to the section(s) you want to learn more about.

How much do you need to save for retirement?

One of the hardest parts about preparing for retirement is thinking about life as a 70-something. A lot of people get so overwhelmed about saving for an unknown future, that they end up not saving anything at all. Thankfully, planning for retirement is not overly onerous, but you will need a road map — one that can evolve over time — to keep you on track.

The first place to start is to think about what your life might look like in retirement. Sit down with a pen and paper and write down your retirement goals.

Then think about how much everything will cost. We don’t know what prices will be like in the future, and in recent years inflation has run below the Fed’s benchmark of 2%, but the average inflation rate in the U.S. over the past century (1913-2013) was 3.22%. So plan for higher prices in the decades ahead. You’ll also want to factor in your day-to-day expenses, like housing costs, food, and health care. Remember, some of the costly expenses you have now, such as a mortgage or childcare costs, will no longer exist, which could result in a decrease in your overall expenses as you near retirement.

Next, add up all the income you might receive in your post-working years. Factor in pension income if you have one, social security payments, and any other dollars, such as rental income from a property, that may come your way. Match up revenue and expenses and you’ll get a good idea of what you’ll need to set aside for every year of your retirement.

Traditional 401(k) plans

A 401(k) is a retirement account offered by a company for its employees. Contributions into this account are pre-tax, which means that like the traditional IRA, they can grow on a tax-deferred basis. You will have to pay the taxman when you withdraw those funds, but if you’re in a lower tax bracket in retirement than you were during your working years, then that tax hit shouldn’t be too great. 

There are several benefits to the 401(k). One is that the contribution limit is much higher than it is with an IRA. Workers who are younger than age 50 can contribute a maximum of $20,500 to a 401(k) in 2022, up from $19,500 in 2021, or $26,000 if you’re over 50. Employers are also allowed to match contributions — though the percentage of contributions they match and the amount matched per employee dollar does vary. Using Vanguard Group-managed retirement plans as an example, in 2019 it reported an average employee contribution rate of 7.0% and an average employer contribution rate of 3.7%.

In 2022, the total employer and employee contributions combined cannot exceed $61,000 or 100% of your salary (that’s $67,500 for those under 50 and older). There’s also a lifetime contribution limit of $305,000. Another key feature is that money gets automatically removed from your check and put into the 401(k), so you don’t have to worry about moving those dollars into the account yourself.

Like the traditional IRA, you will get hit with a 10% tax if you withdraw money before you turn 59 1/2. However, for now, you can remove up to $100,000 from a 401(k) if you or your spouse has lost a job or you’ve been negatively impacted by Covid-19 without the 10% withdrawal penalty.

Roth 401(k)

This is an employer-sponsored account that’s funded with after-tax dollars. Like the Roth IRA, contributions are not tax-deductible, but you also won’t get hit with a tax bill when it comes time to withdraw. Like a traditional 401(k), both employees and employers can contribute, but there are limits. The maximum amount you can contribute to a Roth 401(k) for 2022 is $20,500 if you’re younger than age 50. This is an extra $1,000 over 2021. If you’re age 50 and older, you can add an extra $6,500 per year in “catch-up” contributions, bringing the total amount to $27,000. Contributions generally need to be made by the end of the calendar year.

You can split contributions between a regular 401(k) — using pre-tax dollars — and a Roth 401(k), but your combined investments can’t exceed the maximum contribution amount. This account is ideal for those who think they may be in a high tax bracket in retirement, where they would then have to pay a potentially hefty tax bill to Uncle Sam.

Simplified Employee Pension (SEP) Plans

If you’re a self-employed individual looking to save for retirement, then the SEP plan may be the best option for you. This account, which can only be opened by a business owner with one or more employees or someone who earns freelance income, is similar to a traditional IRA in that pre-tax contributions reduce your taxable income (or the company’s depending on who is contributing) and money can grow tax-deferred until you remove it in retirement. For self-employed and small business owners, the SEP IRA contribution limit was raised to $61,000 in 2022, up from $58,000 in 2021. You can also put money into an employee’s account, however, unlike a 401(k), which is more expensive to set up than a SEP, the staffer cannot contribute to his or her own SEP.